Original illustration by Tse Yuet Ching.

09:42 am | May 26, 2020

Knowledge Gaps / Rebalancing EU-China Relations

Stuck in the Middle

Like other powers, the UK will have to define a balance between economic and political considerations in its relationship with China. That balance, at present, seems some way off.

By Isabel Hilton

Given the prolonged political nervous breakdown that the UK was experiencing even before COVID-19, it should come as no surprise that there are unanswered questions around the country’s current and future foreign policy. The prime minister came to power on the promise that Britain would escape the constraints of the European Union, consistently presented as bonds to be broken. That, he assured the electorate, would allow the UK to bestride the globe as an independent nation, free to conduct its own business according to its own interests and desires.

Among the promises dangled in front of the voters were two key future trading relationships — one with the United States, the other with China. One is still the world’s largest economy and historically the UK’s close strategic ally, the other the world’s second largest economy, with which the UK’s past relationships have been more complicated. The optimistic Brexiteer narrative favoured the promise of a flourishing trade with both that might somehow compensate for any losses in trade and investment caused by leaving Britain’s closest and largest trading relationship.

There is, of course, another way of looking at it: that by leaving an entity that was able to use its collective strength to defend member state interests, the United Kingdom has weakened its influence and its capacity to bargain. Furthermore, it has done so just as the two major powers on which its big bet was focused have entered a period of intense and increasingly hostile strategic competition. As it seeks to strike new relationships with both China and the United States, the UK is at risk of being able to please neither. As things stand, both are likely to seek to insist on preferential loyalty in exchange for favourable terms of trade and investment. Neither will happily brook an attachment to its rival.

The old certainties that have defined each relationship for decades are no longer reliable. British governments and the more traditionally minded British press are fond of invoking the “special relationship” between the USA and the UK as the unshakeable foundation of Britain’s claim to global status. Whilst there has certainly been a deep strategic foundation of shared intelligence and military dependence since WW2, it is unclear how much the current US president continues to value it. There is no evidence either that he plans to except the UK from his general insistence that relationships with smaller, weaker countries must serve the US interest, regardless of any third party conflicts that may be provoked. As the UK sails into these unknown waters with few reliable navigational aids and no fixed destination, some sections of British opinion regard China as a dangerous navigational hazard, while others still see it as the Promised Land.

It is clear that United Kingdom urgently needs a new foreign policy. The UK’s current goals for its relationship with China remain focused on reaching better terms for trade and investment, while its capacity to achieve these goals is diminished. At the same time, it is increasingly evident that geo-political complications have real consequences and cannot be ignored. Like other powers, the UK will have to define a balance between economic and political considerations in its relationship with China. That balance, at present, seems some way off.

Like other powers, the UK will have to define a balance between economic and political considerations in its relationship with China. That balance, at present, seems some way off.

The UK’s current intention is to leave the Single Market by December 2020 in order to be free to diverge from EU norms. This, in turn, leaves open a number of China-related questions. Will the UK continue to support the EU contention that Chinese state aid to its national champions distorts the terms of trade, to the detriment of its trading relationships? Will the UK be obliged to concede China’s long-held wish to be acknowledged as a market economy, despite the many distortions in China’s economy designed to favour its own firms as the price of advances in trade and investment conditions? And if it does, how will that affect negotiations with the United States, given the US stated intention to insert the equivalent of Article 32.10 of the USCMA – the Nafta clause dealing with agreements made with non-market economies – into all future trade agreements?

What view will the UK take of incoming Chinese foreign direct investment (FDI)? The UK has traditionally been among the world’s most open economies, but has not been immune from the EU’s wider concerns about predatory Chinese acquisition of advanced technologies. Now that these debates are visible at a national level, will the UK government be obliged to take a more defensive position over technology acquisitions? The UK will inevitably be handicapped in these reflections by the realities of scale. It is a market of some 60 million people. The EU is a market of 350 million consumers. There seems little reason to believe that China will grant special concessions to the UK that it would not grant to the US or the EU.

Imbalances and Gaps

There is certainly room for improvement in the UK’s economic relationship with China. Despite many trade missions and much positive spin, UK trade with China is both relatively small and heavily balanced in China’s favour. According to a February 2019 British Parliament research briefing, UK exports to China in 2017 were worth £22.3 billion, an eightfold increase over two decades; imports from China were £45.2 billion, representing a 10 fold increase in the same period, resulting in a trade deficit of -£22.9 billion. Overall, China accounted for just 3.6 percent of UK exports and 7.0 percent of all UK imports.

There are structural explanations for the trade imbalance: the UK has de-industrialised in favour of an economy heavily based on services, so in China’s industrial phase the UK had little to offer, unlike Germany which enjoys more balanced trade with China. The UK hoped for a future growth in services that would play to its strengths. But, although Britain has a small surplus with China on trade in services, trade in services remains under-developed: China accounted for only 1.2 per cent of the UK’s global export of services in 2018, and much of that was accounted for by Chinese students in UK universities.

To put these figures in perspective, the EU in 2018 accounted for 49.3 per cent of UK two-way trade, the United States for 14.6 per cent and China 5.3 per cent. Given the size of the Chinese economy, this can only be regarded as modest.

The gap between promise and reality has been a feature of the UK-China story for decades, despite a reasonably sustained investment in the political relationship. Britain recognised the PRC in January 1950, but relations dipped in the Cultural Revolution when PRC fomented riots against British colonial rule in Hong Kong and a Chinese mob attacked the British legation in Beijing. Things improved in 1972 when the Conservative prime minister Edward Heath upgraded the relationship to full diplomatic relations. When Heath visited China in 1974, he was already out of office, but Beijing gave him a big welcome nevertheless, in recognition of his role in restoring the damaged diplomatic relationship.

Under Heath’s successor, Margaret Thatcher, the UK and China negotiated the conditions under which Hong Kong would return to Chinese rule on the expiry of the New Territories lease in 1997. Despite Beijing’s steadily tightening grip on the former colony since the handover, the UK government has done little to defend the terms of that agreement. This passivity has been noted by many analysts as one of several signs that Britain is willing to sacrifice human rights to the promise of China business. It remains to be seen if China’s most recent move – to impose a security law on Hong Kong changes that equation.

Today, despite repeated calls for a strategic vision, the UK lacks a strategic approach to China and relations have been determined primarily by varying levels of caution or enthusiasm in successive British administrations.

Deng Xiaoping and Margaret Thatcher meet on September 24, 1984, to discuss the future of Hong Kong. Image by Brücke-0steuropa available at Wikimedia Commons under CC license.

Among the more memorable approaches was that of the former Prime Minister David Cameron and his Chancellor of the Exchequer (finance minister), George Osborne. Cameron had been prime minister for two years when Xi Jinping came to power, but in May 2012, the UK-China relationship suffered a major reverse when Cameron held a meeting with the Dalai Lama, who was visiting Britain to receive the Templeton Prize. The meeting, held in the environs of St Paul’s Cathedral rather than on the government estate, was nevertheless fiercely criticised by Chinese officials and state media in familiar terms: a foreign ministry spokesman said the UK had "[hurt] the feelings of the Chinese people", meddled in China's affairs and harmed Chinese-British relations. On a more practical level, a visit from senior official Wu Banguo was abruptly cancelled and reciprocal visits were frozen.

Today, despite repeated calls for a strategic vision, the UK lacks a strategic approach to China and relations have been determined primarily by varying levels of caution or enthusiasm in successive British administrations.

The political chill had no perceptible impact on trade, but it did affect the view of the Cameron government on the desirability of maintaining a public commitment to human rights and cause of the Tibetans. In truth the breach was relatively short-lived. There had been a high profile UK trade visit to China in 2010, reciprocated in 2011, and by 2013 and 2014, the exchange of trade visits had resumed.

In June 2014, the Chinese prime minister Li Keqiang visited London and signed two significant agreements: one on Chinese investment in nuclear power in the UK and the other on Chinese involvement in building and operating high-speed rail. China had been offered the opportunity to take a decisive stake in Britain's energy and transport infrastructure. The strategic implications of this decision would come back to haunt subsequent British governments.

Li Keqiang, then vice-premier of the State Council, during a trade visit to the UK in 2011. Image by Foreign & Commonwealth Office posted to Flickr.com under CC license.

The agreements were among trade deals worth £14 billion and were accompanied by lavish praise from Cameron, who called the rise of China a defining event of the 21st century. The nuclear deal was described as part of an overall agreement to tackle climate change. China and Britain also signed a joint statement on climate change.

In May of the following year, 2015, China unveiled its ambitious bid for global technological leadership in "Made in China 2025.” The ten-year plan aimed to transform China into a leading manufacturing power by 2049, the highly symbolic centenary year of the People's Republic of China. It focused on nine key areas: improving manufacturing innovation, integrating technology and industry, strengthening the industrial base, fostering Chinese brands, enforcing green manufacturing, promoting breakthroughs in 10 key sectors, advancing restructuring of the manufacturing sector, promoting service-oriented manufacturing and manufacturing-related service industries, and internationalising manufacturing.

The 10 key sectors were new information technology, numerical control tools and robotics, aerospace equipment, ocean engineering equipment and high-tech ships, railway equipment, energy saving and new energy vehicles, power equipment, new materials, medicine and medical devices, and agricultural machinery. The plan was to be supported by policies to deepen institutional reforms and strengthen financial support. It was a plan that was to ring alarm bells in Western capitals, already uneasy about Chinese acquisition of high-tech companies and concerned about continuing industrial espionage and charges of IP theft.

George Osborne, the UK’s finance minister, with Chinese Vice-Premier Wang Qishan in 2011. Image by Foreign & Commonwealth Office posted to Flickr.com under CC license.

For the Cameron government, however, the China relationship offered opportunity, regardless of the compromises that China demanded and the UK seemed eager to please, even in some extremely sensitive areas. In September 2015, for example, one year after the Uighur public intellectual Ilham Tohti was jailed for life, George Osborne, the UK’s finance minister, led a trade delegation to China. It included a stop in Xinjiang, where Osborne, the first Western official to visit the region, spoke only of business. It was a major propaganda coup for China and earned him lavish praise in the normally hostile nationalist newspaper, the Global Times.

It was a worrying signal for those who also perceived risks in the China relationship. Osborne’s enthusiasm, however, was undiminished. Speaking at the Shanghai stock exchange during the same trip, he made a resounding appeal: "Let’s stick together to grow our economies. Let’s stick together to make Britain China’s best partner in the West. Let’s stick together and create a golden decade for both of our countries. Britain and China: we’ll stick together.”

The enthusiastic rhetoric reached new heights when Britain rolled out its red carpet for Xi Jinping in a lavish four-day state visit in October. Deals worth up to £40 billion were announced, Xi Jinping and his wife visited the queen, and the UK and China announced a global comprehensive strategic partnership .

That friendship included some troubling detentions in London during Xi’s October 2015 visit: two Tibetan women were detained for waving small Tibetan flags and a former Tiananmen activist, Dr. Shao Zhang, who had been granted political asylum in the UK was arrested for alleged breach of the peace and later charged with conspiracy to commit a public order act. This more serious charge gave the police powers to search his home. All charges against Dr. Shao Zhang were later dropped and an investigation by the Independent Office for Police Conduct (IOPC) revealed that his arrest was the result of Chinese pressure to ensure that Xi Jinping suffered no “embarrassment” during his visit. Home Office officials had also made “unusual requests” to the police about the visit, an intervention that one police officer described as “unprecedented” and that had contributed to Shao’s arrest for conspiracy. The report had concluded in 2018 that police officers had a case to answer for gross misconduct. No officer was ever charged.

“They were very rude to the ambassador,” said her Majesty, sympathetically.

A rare glimpse behind the official curtain of enthusiasm was afforded by a conversation between Queen Elizabeth 11 and Commander Lucy D’Orsi, who had been in charge of security tor the Chinese state visit. The exchange was captured at a royal garden party, when D’Orsi described to the queen how Chinese officials had stormed out of a meeting with herself and the British ambassador to China, Barbara Woodward, threatening to call off the visit.

“They were very rude to the ambassador,” said her Majesty, sympathetically.

The sovereign’s unguarded remarks were in contrast to the enthusiasm of the prime minister for George Osborne’s Golden Era of UK-China relations. Reality, however, never quite caught up with the extravagant promises. Seen from Beijing, the UK was at best a second-tier partner, on a level with Australia or Vietnam. In Europe, Germany, China’s key partner, exported four times as much to China as the UK and imported twice as much. More importantly, Germany’s position in the EU guaranteed China’s attention. France, not to be outdone, had begun a strategic dialogue with China in 2001 and raised its relationship to a global strategic partnership back in 2004, more than a decade before the UK.

Nor is it obvious, despite the rhetoric, that UK government effort substantially changed business outcomes. In 2010, the UK and China promised to increase bilateral trade, which at the time stood at $70 billion per annum, to $100 billion by 2015. In fact it rose by only 30 percent. In the previous five years, however, with less official attention, it had grown by more than 130 percent.

Britain came late to the game, but once on the field it strove to be significant, and in the era of Made in China 2025, the UK’s advanced technologies, and its open economy held some interest for China. Equally important was the UK’s new enthusiasm for China’s global position and the Belt and Road Initiative in particular. When, in 2015, China launched its first multilateral bank, the Asian Infrastructure Investment Bank, the UK disregarded Washington’s disapproval and became the first OECD country to sign up.

The Gild Comes Off the “Golden Era”

In retrospect, that busy year of 2015 may have been the highpoint of the “Golden Era.” The following year, David Cameron abruptly resigned after the referendum that he had called on British membership of the EU returned its result — one that Cameron had neither anticipated nor supported. Under his successor Theresa May, whose premiership was to be blighted by the fallout from that referendum, UK China relations cooled substantially.

The first shock came in October 2016 and concerned one of Cameron’s signature projects – Chinese involvement in the proposed nuclear power plant, Hinkley Point 2, scheduled to be built in the English county of Somerset.

The project had a troubled background. Much of the UK’s ageing nuclear fleet is due for retirement in the 2020s and the Labour prime minister Tony Blair had decided that it should be replaced, over the objections of those who argued that Britain no longer needed nuclear power. Bidding opened as the global financial crisis hit and the bidders were few.

A view of the Hinkley Point A nuclear power plant in 2014, with heaps in the foreground standing on the proposed site of Hinkley Point C. Image by Reading Tom posted to Flickr.com under CC license.